January 2011 Archive for Farmland Forecast

The rural economy grew for the third straight month and advanced to its highest level since 2007, according to the Rural Mainstreet survey. Rising farm income and healthy spending from farmers continues to propel the rural economy.

The overall Rural Mainstreet Index (RMI) increased to 59.3 from 55.4 in December, according to the survey of bank CEOs in a 10-state region. This marks the third straight month the index is above growth neutral 50.0, and the fifth straight month the index has increased.

"Farmers continue to spend their healthy and growing income on Rural Mainstreet businesses. From farm equipment to farmland to trucks, agricultural producers in the area are spending at a brisk pace," said Creighton University economist Ernie Goss, co-author of the report.

Agriculture

Farmland prices continue to be robust as the farmland price index remained above growth neutral for the 12th straight month at 75.4, but down a tick from December’s 76.9. Respondents noted they expect the strong farm economy to drive cash rental rates for farmland in 2011.

"More than three-fourths of the CEOs anticipate cash rents to rise by more than 5 percent in 2011, and approximately one-fifth expect these rents to grow by more than 10 percent," said Goss.

Banking

The strong rural economy has dampened the growth for lending as the loan volume index for January declined to a record low 33.9 from December’s 52.3 and November’s 35.3. The other two banking indicators, checking deposits and certificate of deposits, remained above growth neutral for the 11 straight month.

The rural economy continued to add jobs in January as the jobs index increased to 52.5 in January from last month’s 50.1. "For this part of the country, rural areas are clearly outpacing the urban areas in terms of job growth. While employment in the urban areas is virtually flat, annualized growth in the rural areas is a healthy 2 percent," said Goss.

Bankers continue to have a bright outlook on the rural economy as the economic confidence index improved to 63.4 in January from December’s reading of 62.2

Outlook

The rural economy continues to be a bright spot in an otherwise uncertain economic environment. January did see a pause in farmland appreciation, but this is to be expected as the traditional selling season slows down.

The outlook for 2010 continues to be bright. High grain prices and expectations of record planted acres could bring record production and profits to the rural economy.

Global inventory levels of corn are nearing record lows, driven by a disappointing U.S. corn production in 2010, one of the strongest La Nina weather patterns in the last 50 years, higher than expected ethanol use, and strong demand from emerging markets. As we look towards our outlook for corn in 2011, our continued focus is China’s insatiable demand and short supply of corn.

Rapid population and economic growth have driven China’s growing demand for grains. Economists have long shown that as GDP rises and a middle class develops, consumption of protein also rises. The USDA estimates that of every new dollar spent in China, 40% is allocated to food.

2010 was a turning point for China as the country announced it would no longer be self-sufficient in corn production and would turn to imports to meet demand. Shanghai JC estimates that China will import roughly 6 million tons of corn in 2011 and up to 15 million tons in 2014. Other analysts estimate China will import up to 8 million tons of corn in 2011, which is a roughly 600% increase from 2010’s Chinese imports of 1.3 million tons.

We see China’s transition to a net importer of corn very similar to China’s transition to becoming a net importer of soybeans. Before 1995, China was a net exporter of soybeans but by 2010, it is the world’s largest soybean importer and imported more than 57 million tons of soybeans.

To ease domestic prices, the Chinese government has been selling reserves. In 2010, the government sold 26.1 million tons of corn from reserves and sold 9.6 million tons in 2009. The exact amount of government supplies is unknown, but the government can only temper prices for so long. Imports of corn will be the primary solution to solve the shortfall.

Where will China import all this corn from? The first place they will turn to is the U.S., which is the world’s largest corn exporter, accounting for roughly 60% of global corn exports in 2009. Argentina and Brazil, the second largest exporters, only account for roughly 10% of global exports each.

If China imports 8 million tons of corn in 2011 and the U.S. maintains its 60% market share, this would translate to an incremental 170 million bushels of corn being imported from the U.S.

The USDA currently estimates ending stocks of corn at 745 million bushels. If we subtract an additional 170 million bushels for Chinese imports, we are getting dangerously close to zero. Any unexpected surprises from the Chinese in 2010 will have a big impact on the world’s corn supply and prices.

The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report on Wednesday. January’s report is typically one of the most anticipated and it was not a let down.

U.S. grain supplies were substantially reduced for the 2010/11 marketing year due to lower grain production estimates and higher use. A late harvest in the U.S. led the USDA to reduce U.S corn yield estimates to152.8 bushels per acres from 154.3 bushels. Grain supplies are now critically tight and discussions may turn to rationing.

Corn

Bullish news for corn continues into 2011 as the 2010/11 U.S. corn production was decreased by 93 million bushels to 12,447 million bushels due to lower corn yields across the country. Ethanol and industrial use was both increased by 100 million bushels, partially offset by a 100 million reduction in feed and residual.

Ending corn stocks for 2010/11 will be the lowest since 1995/96 at 745 million bushels and leaves the ending stocks to use ratio at 5.5%. The USDA season-average farm price for corn is estimated at $4.90 to $5.70 per bushel, a midpoint increase of 10 cents and the highest season-average ever.

World corn production was also lowered to 816 million tons from December’s forecast of 820.7 million tons, due to the decrease in U.S. production and reduced yield prospect for Argentina. Global corn ending stocks were reduced by 3 million tons to 127 million tons.

The USDA also reported the December 1 Quarterly Stocks at 10.039 billion bushels, which was substantially lower than analyst estimates of 10.067 billion bushels. This is the smallest first quarter stocks number in four years and the largest first quarter use as a percentage of the crop since 1995.

Soybeans

The USDA also lowered production estimates for soybeans to 3.329 billion bushels, from 3.375 billion, due to a 0.4 bushel per acre reduction in yield and a 0.2 million acres reduction in harvested acres.

Ending stocks for soybeans in 2010/11 were lowered to 140 million bushels, from 165 million bushels in December. The USDA season-average farm price for soybeans was narrowed to $11.20 to $12.20 from $10.70 to $12.20.

Global soybean production was reduced by 2.3 million tons to 255.5 million tons. Production estimates in Argentina were lowered due to an expected decrease in yields, partially offset by an increase in production in Paraguay.

Quarterly stocks for soybeans were reported at 2.277 billion bushels, well below estimates and down 2.7% year over year. This is the second largest use as a percentage of crop, primarily driven by strong Chinese demand.

Wheat

U.S. 2010/11 wheat production numbers were unchanged but ending stocks were lowered by 40 million bushels to 818 million bushels. The decrease was due to a 50 million bushel increase in exports, offset by a 10 million bushels reduction in feed. The USDA season-average farm price for wheat is estimated at $5.50 to $5.80, up from last month’s estimate of $5.30 to $5.70.

Total world wheat production was estimated at 645.82 million bushels, down from December’s estimate of 646.51 million bushels. The decrease was due to heavy floods in Australia and difficult production in Kazakhstan, partially offset by increased production in Argentina and Brazil.

The USDA estimated that winter-wheat planting was 40.99 million acres, a 9.8% increase from the prior year, which was the smallest planted area since 1913.

December quarterly ending stocks for wheat were reported at 1.927 billion bushels, up 8% from last year. This is the largest second-quarter stocks estimate since the late 1980s.

Overview

Grain stocks continue to become tighter as every day passes. There is currently less than a three week supply of corn available. Corn prices above $6.00 will pressure food prices and supply rationing.

All eyes will now be turned to U.S. planting estimates for this spring. We expect that farmers will shift more acres to corn from soybeans to capitalize on the high prices. Analysts expect around 90 million acres of corn to be planted in 2011, with some estimates reaching as high as 93 million acres, compared to 2010’s planting of 88.222 million acres.

Pay attention to the grain market in 2011 as it could be an exciting year!

Grain prices continued their rally in December, which has kept the demand for farmland high. Corn, soybeans, and wheat all saw double-digit gains while farmland value reports revealed gains as high as 19% in localized areas over the last twelve months, according to Iowa State University Extension’s 2010 Land Value Survey. An extension of the ethanol blender’s tax credit was a major factor in the increase of grain prices this month. Weather conditions have also played a big role in grain prices as La Nina has damaged crops in South America and Australia has experienced heavy rains.

Grain Prices

Grain prices rallied again throughout December, climbing to near two-year highs for corn, soybeans, and wheat. Foreign demand continues to be the driving force behind the current rally. March 2011 contracts for corn, soybeans, and wheat all increased over 12% during December. Investors took some profits at the end of the month bringing prices down a small amount before a weak dollar ended profit taking. Prior to end of the year profit taking, corn had sustained a 10 day rally.

In December, corn prices increased by 15.6% and closed the year at $6.29 per bushel. Year-over-year, corn prices are 40.0% higher. Global demand has been increasing for U.S. corn and supplies are the tightest since 1996. Global corn consumption has outpaced production for the second straight year. Food inflation is a major concern across the world. China has increased their interest rates twice in the last two months to battle inflation. Worries over lower production in South America due to the lingering La Nina have also fueled the current rally in grains.

Soybean prices increased by 12.1% in December, to $14.03 per bushel due tightening supplies. The December WASDE report estimated U.S. soybean ending stocks to decrease by over 10% due to increased exports. Projected planted acres and the health of the South American soybean crop will be key factors for soybean prices throughout the first quarter of 2011.

Wheat prices rose to $7.94 per bushel this month, a 14.6% increase, due to the decreased value of the dollar and increased foreign interest in U.S. wheat. In late December, Egypt, the largest importer of wheat, ordered 600,000 metric tons of U.S. wheat. Poor U.S. winter wheat conditions, due to low moisture, have also supported strong wheat prices. Crop condition reports and the January estimate of planted wheat acres should be the key factors affecting wheat prices, along with soybeans and corn. If planted wheat acres are high, expect bullish outlooks for corn and soybeans.

WASDE

The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report in mid-December. The USDA made few changes in the December WASDE, which is to be expected.

U.S. soybean ending stocks were tightened by 20 million bushels from November’s estimate and global soybean ending stocks were decreased by 2% due to strong demand. Small changes were made to U.S. ending corn and wheat stocks.

The only change made in the December WASDE to corn estimates was a 5 million bushel increase to corn imports from Canada, which had a larger crop than expected this year. Ending U.S. corn stocks increased to 832 million bushels from November’s estimate of 827 million bushels. Despite increasing reports of higher ethanol production, ethanol usage was left unchanged at 4.8 billion bushels.

Crop Conditions

La Nina continues to affect South American crops and specifically in Argentina. Farmers are having a hard time planting a second soybean crop due to the extremely hot, dry weather. Sub-surface moisture levels are dangerously low for crops. This extreme weather has caused northern portions of Uruguay and Brazil to declare a state of emergency for farmers due to crop damage.

In Argentina, the world’s second largest exporter of corn and third largest of soybeans, corn production was expected to be higher this year because of a 23% increase in planted acres. The hot and dry weather caused by La Nina now could reduce production by 16%, according to Econometrica consultancy in Buenos Ares.

Wheat production in Australia has been estimated below average due to damaging rains and a wet harvest. Currently, wheat harvest is progressing faster than previously expected in Australia but yields are still anticipated to be lower.

Farmland

Farmland continues to be the “hot” topic in December. The Creighton University farmland price index was above growth neutral 50.0 for the 11th straight month at 76.9 in December. This is the highest the index has been since March of 2008. Rising farm income has allowed farmers to reinvest their cash flows back into farmland to expand their operations.
Iowa State University Extension released their 2010 Land Value Survey in December. The survey found Iowa farmland values 15.9% higher from 2009. The average value of Iowa farmland was pegged at $5,065 per acre by ISU. High commodity prices, healthy lending conditions, and a limited supply of land are the biggest factors for the recent increase in Iowa farmland values.

Outlook

Great looking, top quality farms are selling for a big premium this season. Surveys and reports on farmland values across the Midwest increasing by 10% to 20% are all paralleling actual land sales in the region. Since the U.S. harvest finished early this year, land sales have been plentiful. Early sales brought strong prices due to two key factors:

• Increased farmer income – Farmers make up the overwhelming majority of farmland buyers. This season is no different. Farmer income is much higher this year because of the elevated commodity prices.

• Limited 2009 sales – Since the 2009 harvest was delayed into early 2010 in some areas, land owners did not sell very much land. As the majority of buyers, farmers could not justify many land acquisitions because their income was late coming in.

The early sales that brought strong prices have continued to be encouraging to other land owners to sell this season since prices are high.

We agree that prices are high, but the outlook for farmland is very fundamentally strong. Even at $5 corn prices, $5,000/acre land is still justifiable. Farmland values are dependent on long-term grain prices. A small shift in corn prices will not have a very meaningful affect on land values. Ending grain stocks are very low while demand is ever rising. The basic supply and demand is in place for farmland to continue its bullish trends in the long-term.